Well that was unexpected…
A lot of changes in the first Conservative budget since 1996 that set the tone of their government term. Big hitters are the introduction of the National Living Wage, the changes in dividends tax and the comprehensive welfare changes.
George Osborne was clear from the start, positioning this Conservative government to take Britain from “high welfare, high tax, low wage” to “low welfare, low tax, high wage society”, producing a “bold budget” with “big ambitions” that fits the economic forecast
The economy grew 3% last year, the fastest in the G7. The forecast for 2015 is 2.4%, faster than many countries including US and France.
Two million more people are in work with a million more expected in next 5 years according to the Office of Budget Responsibility (OBR) but Osborne wants to create two million.
Increased tax receipts and the sale of government assets higher than 1987 all enable us to slow the pace of deficit reduction. A surplus is now expected in 2019/20 of 0.4% – the largest in 40 years.
HMRC will have extra funding to support their work tackling tax avoidance – tax fraud, offshore trusts, hidden companies and disguised employment.
Autumn Charter: government will be required to keep a surplus budget in ‘normal conditions’. Growth of less than 1% means the chancellor and the OBR will work together to create a budget that is responsible, tested by government, with the aim of achieving a surplus as soon as possible.
£17 billion to be found: £12bn from welfare and £5bn from tax avoidance/evasion measures. Spending review in autumn for a further £20bn to be found from government spending.
NHS is a priority and the Stevens Plan will be funded, receiving £10bn in real terms by 2020 and the government has committed to the NATO pledge to spend 2% of GDP on defence.
Cars and Roads
Our road network is rated lower than Puerto Rico and Namibia! Though spending was increased in 2014/15 from 2017 all Vehicle Excise Duty (VED) will be put in to a Roads fund that will once again be used only on improving Britain’s roads.
Funding for this has been secured by changing the VED banding on new cars from 2017. Whilst rates for existing cars will stay the same, new cars will be taxed on emissions for the first year and will then go in to one of three set bands at set rates:
- * Zero emissions: £0
- * Standard: £140
- * Premium: £450 (£310 surcharge)
Fuel duty will remain frozen this year.
The personal allowance will be increased to £11,000 in 2016/17 with a view to making it £12,500 by the end of the parliamentary term. Legislation will be put in place to ensure this rises in line with the minimum wage in future.
The higher rate tax threshold will increase to £43,000 in 2016/17, intending to increase this to £50,000 by the end of the term, helping 29million people pay less tax.
A new National Living Wage will be introduced from April 2016 of £7.20/hour for those who are 25 years old or over, to increase to £9/hr by 2020.
A surprising but very significant reform to dividend taxes is not a welcome one! From April 2016 the tax credit that currently accompanies all dividends is to be scrapped. It will be replaced with a new £5,000 dividend allowance and new dividend tax rates, these are:
- * Basic rate tax on dividends 7.5%
- * Higher rate tax on dividends 32.5%
- * Additional rate tax on dividends 38.1%
Under the current regime basic rate tax payers have no additional income tax to pay on dividends but this will all change under the new rules.
This is a major change to the tax system and one that requires further investigation therefore we will be releasing a separate blog article dedicated to this issue shortly.
Permanent non-domicile tax status is being abolished from April 2017 if you live in the UK but consider your permanent home to be elsewhere, so all income will be taxable in the UK.
Regulations of claim management companies (i.e. PPI) will be reviewed and charges capped, whilst Insurance Premium Tax will be raised to 9.5% from 6% with increases applicable to most policies and administration fees.
Three million more apprenticeships will be created, but the quality will be reviewed.
The SMA grant will be replaced with a loan from 2016/17, but the amount available will increase to £8,200/year. The loan will be repayable once earnings go above £21k and this threshold will be held frozen for five years.
The Help-To-Buy ISA will be introduced as planned, allowing first time buyers to build a deposit with the government contributing £50 for every £200 deposited.
Rent a room relief will be increased from £4,250 to £7,500 per annum.
Higher-rate tax payers with rental properties who offset the interest on their buy-to-let mortgage against their rental will have the relief restricted to the basic tax threshold. This is a big change that will be introduced over four years.
A personal allowance of £175k will be introduced from 2017 to allow family homes to be left to your children, in addition to the current £325k inheritance tax threshold. Both allowances will be transferrable to your spouse, meaning you can leave family homes up to £1m to your children completely free on inheritance tax.
Tax relief on pensions contributions for those earning over £150,000 will be gradually reduced at a rate of £1 for every £2 earned above £150,000, until the tax-free allowance reaches £10,000.
Among the many welfare changes:
* Free childcare for 3-4 year olds from Sept 2017 up to 30 hours/week for working parents
* Support for those with health challenges to get back to work
* Disability support won’t be means tested or taxed
* There will be what Osborne’s termed a “youth obligation” – earn or learn. Between the ages of 18 and 21 housing benefit will be lost between as well, unless you’re vulnerable
* Working age benefits will be frozen for four years, to allow the salary increases to catch up with benefit increases since the crash.
* Total benefits will be capped to £23k in London and £20k elsewhere, reduced from a £26k cap
* Support for the Mortgage Interest Payments benefit will be turned in to a loan
* Many changes around tax credits for children, including restricting support to two children
The government announced they are continuing to review the effectiveness of IR35 legislation and tackling non-compliance. Personal Service Companies (PSC’s) should make sure they review their situation and be comfortable in how they’re treating each individual contract.
The Employment Allowance is being scrapped next year for sole director Limited companies, meaning PSC’s will no longer be able to make use of this. Our advice for next year’s salary will be to reduce this down to the NI threshold following what was common practice two years ago before the Employment Allowance existed.
The Employment Allowance for the remaining qualifying companies will be increased from £2,000 to £3,000.
The 20% main rate of CT is being reduced to 19% in 2017 and then to 18% in 2020 – “Britain is open for business” says Osborne.
For those companies with profits over £20millon the due date for Corporation tax is being brought closer to the year end.
3 million new apprenticeships will be created by 2020, funded by a levy on large employers.
Annual Investment Allowance
This was due to fall to £25k on 01/01/2016 but will instead be set at £200,000.
More enterprise zones will be created, building on the 24 in place already. These can be really beneficial for growing business and more information can be found here http://enterprisezones.communities.gov.uk/.
A lot of changes in this budget with the average full-time employee likely to gain, but incomes of those with PSCs and small business owners are drastically reduced. They’re unlikely to agree with George Osborne that it is a budget supporting aspirations, which keeps promises and continues to reduce the deficit providing stability for future generations.
Businesses as a whole have gained from lower CT (the lowest in the G20) and more reliefs available, though the impact of the living wage is yet to be seen. The Budget of Office Responsibility think it will mean 60,000 fewer jobs that are offset by the creation of a million jobs over five years; given the message the introduction of the living wage sends the government will happily accept this.
At the end of the day, the big news for company owners and investors is the change in dividends, they are very unlikely to be getting the pay rise promised in the closing moments of the budget announcement.
See our article on how this budget impacts small business owners: The Conservative government kick small business owners in the teeth